Economists have failed dismally to convince the public of the benefits of trade. Perhaps we should admit that and start from scratch.
We need some serious discussions about energy policies. U.S. gasoline prices took their highest two-week jump in 50 years recently. As is usual whenever fuel prices rise, some people called for government action to achieve “energy independence.”
The issue of whether or why the U.S. economy is vulnerable to Mideast politics formed an integral part of the public debate over the past year about going to war with Iraq. Dependence on imports even entered into the question of whether we should send Marines to Liberia. Some Africa specialists noted that we soon will get about a fourth of our oil imports from West Africa.
Keeping basic issues in mind is helpful.
Households and businesses use energy from a variety of sources — petroleum, coal, natural gas, nuclear as well as hydro, wind and solar. Petroleum is the only of these for which we import substantial quantities from outside of North America. While many people still heat with fuel oil, especially in the Northeast, petroleum is most crucial as a motor fuel.
Two problems are the proximate cause of most discontent with our existing situation: Gasoline prices are perceived as high and gasoline prices are volatile. It is impossible to fix both. There is no way we will have gasoline prices that are substantially below current levels and that are stable.
If we cannot get both of these stones out of our shoe we have to decide which is more troublesome, high prices or price volatility? We can cure one only at the cost of exacerbating the other, especially if we begin by assuming that achieving “independence” from oil imports is necessary.
The logic seems something like this: Political events worldwide can jostle crude oil prices. Since we import a substantial fraction of our crude needs, such price changes rapidly affect gasoline and heating oil prices. If we reduce imports, prices would be more stable.
We could reduce imports in a number of ways. We could use less petroleum and produce more of it. We could substitute energy from domestic sources, especially electricity. These measures, all possible with current technology, would reduce imports. Unfortunately, both businesses and households would have to spend more on energy.
What price are we willing to pay to achieve energy independence and the stable prices that come with it?
Economists of all political persuasions would argue that the least costly way of reducing oil imports would be taxing all oil used. Prices would rise and consumption would fall. It would also provide an incentive for people to use electricity instead of oil wherever possible. It would boost willingness to pay for electric or fuel cell cars.
Higher electricity demand and use would raise electricity prices somewhat. Wind, hydro and solar power would be more viable at higher electricity prices. If we tax coal- and nuclear-generated electricity to reflect their true environmental costs, we would motivate some shift to renewable sources. And we would reduce our economic dependence on oil imports.
But, as the attorney who was offered wealth and power in return for his soul muttered, “There has to be a catch somewhere!” The catch is that we would all spend more on energy.
Few of those who call for energy independence want to face that trade-off. They imply that if we just had the right “energy policy” we could achieve lower imports and stable prices at no cost. This is pure fantasy.
They assume that technologies exist that would maintain our current levels of consumption while using less oil. For some unknown reason, no one has bothered to adopt these technologies yet, but that oversight will be cured miraculously by the right policy. Yes, and Berkshires could soar with eagles if they only extended their hitherto unnoticed wings.
Those who approach the question from the perspective of environmental protection make a much better case. It is clear that we could make a substantial improvement in our standard of living, broadly defined, if only we would tax all energy use at levels that approximate the environmental damage each causes. We would not only reduce pollution but we would use resources more efficiently.
Finally and collaterally, it would reduce oil imports and economic disruptions caused by global oil market volatility. But this suggestion appears to have no chance with President Bush in the White House and Dick Cheney as vice president.
Eventually however, reason will win out. In the meantime, I’d rather face low but volatile gas prices than ones that are stable but permanently high.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.